The New Thing in Green Tech: Micro-Hybrid Batteries

NEW YORK (TheStreet) -- The world's biggest car companies and battery makers will gather for the 13th European Lead Battery Conference next month. The focus at the Paris event will be micro-hybrid vehicles with stop-start idle elimination, a sensible and cheap fuel-efficiency technology that will be used in 35 million cars a year by 2015. While I've agreed to give a keynote presentation to the ELBC's opening session, I expect to learn more than I teach and look forward to sharing new developments with readers.

Micro hybrids are not a subsidized technology for eco-elites who eagerly embrace "somewhere over the rainbow" payback periods. They're hard-working fuel-efficiency systems for the rest of us -- normal people who grapple with monthly budgets and expect reasonable returns from their investments in fuel efficiency. The primary market driver will be stringent new emissions-control and fuel-economy regulations in Europe, North America and Asia. When you get down to brass tacks, consumers won't have a choice because stop-start will be installed as standard equipment, just like seat belts, disk brakes, pollution-control systems and airbags.

For investors, micro hybrids are an automotive mega-trend that will generate several billion dollars a year in incremental revenue for a handful of companies that control technology. Since most investors have never even heard of micro hybrids, the stock prices of those companies don't reflect the rapidly changing market fundamentals.

Micro hybrids are the most sensible fuel-efficiency technology imaginable. They turn off the engine when a car comes to a stop and automatically restart it when the driver takes his foot off the brake. Simple "light micro hybrid" systems add $300 to the cost of a new car and save about $80 a year on gasoline. Sophisticated "heavy micro hybrid" systems can add up to $1,000 to the cost of a new car and save up to $250 a year on gas.

The choke point for all micro-hybrid systems is the battery.

The battery challenges of micro hybrids are easy to understand. Starting an engine 15 times during a typical daily commute uses about eight times more energy than a single engine start. It's not a one-for-one increase because restarting a warm engine is easier than starting a cold one, but the increased starter demands are massive. An even bigger problem is powering the accessories during engine-off intervals, a task that can demand up to 10 times more energy than the starter. When you work through all the calculations, a micro hybrid demands 90 to 100 times more work from its battery than a car without stop-start.

The flooded lead-acid starter batteries we've all come to know and hate simply can't cope.

Since automakers know that conventional starter batteries can't withstand the demands of micro hybrids, they're all using cutout systems as a work-around. These systems disable the stop-start function whenever the battery isn't ready for another cycle. It's a suboptimal solution because a disabled stop-start system can't conserve fuel, but it's the best car companies can do until better batteries are available in relevant volumes.

In public, the automakers are all building micro hybrids as a core element of their regulatory compliance strategies. Behind the scenes, they're all putting tremendous pressure on battery manufacturers to quickly upgrade their products while controlling costs. For the first time in decades, the battery business is changing rapidly.

The first response from major battery manufacturers, including Johnson Controls ( JCI) and Exide Technologies ( XIDE) was to introduce enhanced flooded batteries that perform up to four times better than conventional batteries and can be made in existing factories. The second response was aggressive capital spending to increase production capacity for absorbed glass mat, or AGM, batteries that perform up to 10 times better than conventional batteries.

From battery manufacturers' viewpoint, their efforts to boost performance by a factor of up to 10 times while controlling costs are nothing short of heroic. From automakers' perspective, there's still a huge gap between the 10 times the battery manufacturers are delivering and the 100 times the industry needs at a price point that doesn't push payback periods into the forever range.

That gap represents a wide-open window of opportunity for energy-storage innovators that can fill the "white space" with new products that offer significant performance gains at a suitable price point. It's a daunting challenge, but not an impossible dream.

In 2010, Maxwell Technologies ( MXWL) and Continental AG introduced the first advanced energy-storage system for micro hybrids. It pairs an ultracapacitor module from Maxwell with an AGM battery from Continental to provide the additional cranking power required by diesel micro hybrids from Peugeot-Citroën. The dual device architecture complements AGM batteries instead of competing with them. Shifting the starter loads to the ultracapacitor slows battery deterioration and extends AGM battery life by up to 30%. It's not a perfect solution because it can't address the accessory loads that are over 90% of the problem, but it is a step in the right direction with a product that's scalable to relevant volumes.

A second advanced energy storage system for micro hybrids is the PbC battery from Axion Power International ( AXPW). The PbC is an asymmetric lead-carbon capacitor that replaces the lead-based negative electrodes in a conventional AGM battery with carbon-electrode assemblies. The result is a hybrid device that offers extraordinary charge recovery times while eliminating negative electrode sulfation, the principal failure mechanism of conventional lead acid batteries.

Like the Maxwell ultracapacitor solution, the PbC complements current battery technologies instead of competing with them because the PbC electrode assemblies have been designed to work as plug-and-play replacements in any AGM battery plant. The PbC hasn't scored a design win yet, but extensive data generated in three years of laboratory and vehicle testing by several first-tier automakers indicate that the PbC is the only proposed solution for micro hybrids that already meets all of the automakers' performance goals. Since the PbC is a newer technology, Axion will face significant hurdles as it builds production capacity and works to reduce costs while further improving performance.

Micro hybrids have created a truly unusual business dynamic in the battery industry. Automakers have decided to implement stop-start technology as fleet-wide standard equipment in response to emissions-control and fuel-economy regulations. They're building the cars today and depending on the battery industry to catch up.

The first beneficiaries of the micro hybrid tsunami will be JCI, Exide and several foreign battery manufacturers that can upgrade their flooded-battery products at a modest cost while expanding AGM battery manufacturing capacity. They will all enjoy improved margins on enhanced flooded batteries and very attractive margins on AGM batteries. According to JCI, an automaker shift from flooded to AGM batteries will double per-vehicle revenue and triple per-vehicle margins.

Over the next few years, the larger beneficiaries will be innovators like Maxwell, Axion and several other companies that are working to improve micro-hybrid battery performance by another order of magnitude. It's shaping up as a real horse race where the incremental annual revenues to the winners will be many times their current market capitalizations.

Disclosure: The author is a former director of Axion who has a substantial long position in its common stock.

John Petersen, a lawyer and CPA, has specialized in advising companies on corporate finance and business development for more than 30 years. He writes the deathless prose and dire warnings investors read in offering documents and SEC reports. While Petersen has served as a board member or executive officer for a handful of public companies, the bulk of his work is behind the scenes where precision and a passion for detail are essential. Petersen�s investing style is that of �elephant hunter,� and nothing grabs his attention like a �multi-bagger� in the rough. His investing time horizon is two to four years. On the long side, Petersen looks for blood in the streets and stock prices that have been beaten down to unconscionably low levels. On the short side, he seeks out high-profile companies that trade at unsustainable levels while hype-intoxicated executives make the same tactical mistakes he�s suffered through with clients. Petersen�s sector focus is batteries and efficient transportation because he has almost a decade of experience in the industry, including a three-year stint as board chairman of an R&D-stage battery-technology developer. He�s convinced these sectors are emerging investment mega-trends.

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